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How To Make 36% Return Risk Free

What would you say if I can show you a way to make 36% return on your money with zero risk? Sounds impossible, right? Well it can be done, as I will explain.

Whenever someone comes to me for advice on how to invest money, the first question I ask them is if they have any credit card balance. If the answer yes, I’ve found their investment. Paying off high interest credit cards is a 100% safe investment. With many credit cards charging 18% interest it makes absolute sense to pay those off because it’ll be pretty hard to find an investment that can make that kind of return, without risk.

Another thing to keep in mind when it comes to investing is to always think after tax. Credit card interest is paid with after tax dollars. If you’re at the 50% tax bracket you’ll have to earn $2 in order to pay $1 in interest. So that 18% credit card interest becomes 36% after tax. How many 100% safe investments can you find that will give you a 36% after tax return? Ya, none.

Still, I find it amazing that many people have investments like stocks, bonds, mutual funds, etc. and still run a credit card balance. That makes absolutely no sense, unless those investments are making more than 36%, you will be better off to sell the investment and pay off the credit card. I will admit that paying off a credit card is not as glamorous as buying a stock, and there is a psychological effect of actually owning something but from a financial planning standpoint, you should be credit card debt free before you start investing.

also, as amazing as it is, some people do have a CC balance, but are paying it off via their investment profits. A friend of mine is/was in 10K debt but managed to execute some strong trades and has cut that debt in half by selling portions of his portfolio and it makes monster returns. Remember, 17% CC interest is per year, so if you can make more than 2% interest monthly, you are still ahead. Its not a wise move, but many people do it and come up ahead. Esp if you have other expenses to offset any income you are making on the market.

This is the one that a lot of people miss. You have to remember that CC debt which is charged at between 18 and 36% and paid from after tax income which can up to double the actual amount of money you need to earn to be able to pay, which basically adjusts the interest rate to 36% – 72%. When earning money you are forced to pay taxes upon the money earned which means that you have to have a return of 36% to 72% to just break even (27% – 54% if capital gains). It is nearly impossible to find a secure investment that pays 3% lately let alone 10x that.

For those of us in Canada the second place to look for a sizable ROI is your mortgage. Similar rules apply since you are paying with after tax dollars and mortgage interest isn’t deductable (well, normally) so a 5% mortgage hits your earnings as if it was at 10%. Again, it’s hard to find an investment that will return this amount with no risk, but some of us are that lucky so your mileage will vary.

that is true Cam. I guess I was not looking at long term credit card debt when I was writing my initial post.

For some of the people that I know who invest and reside in Toronto, they just balance trans their debt to a low interest card or unsecured LOC and then invest their capital. This capital is not a lot, but with some good day trades, is paying off the monthly 3% minimum along with more of the initial balance. This has excelled paying their debts.

When it comes to taxes, with some of them paying rent, they are off setting a lot of their gains by claiming rent/old tuition/RRSP contributions which help.

I agree that paying debts is paramount for financial prosperity. I have seen some people come and ask about buying a condo when they have a hard time paying their cards off, so its really a paramount topic when good points for both sides.

John, sometimes your posts are so painfully obvious and very funny. Your logic makes complete sense. The very reason the U.S. is in trouble is because people over leveraged themselves in every aspect of their life–> credit cards, mortgage, home equity line of credit, personal loans, etc.

Hi Philip, you are really leaving out most of the really dangerous stuff in the realm of leveraging like leveraging friendships via social networks in the end nobody has that friendship currency that has been inflated by the network, just test it by asking your wide network to come and help you to clean your apartment.

Makes perfect sense. I’ve never had a credit card debt even though I use it to pay all my bills and for as many purchases I can. The trick is to pay off the balance before they charge you interest. This way the card works for you and not the other way around.

John, if I may make a suggestion that may possibly increase the amount of comment on your already busy blog. As a personal favor to an Aussie blogger, could you possibly install a ‘subscribe to comments’ plugin so that I, and anyone else who is interested, can be notified when someone has added a new comment?

I totally understand, but then all you need is one that gives them the option. If they do not want to subscribe they don’t have to, and when they want to unsubscribe they can. In that way the user controls their own commenting fate.

Ha ha, another Jake Stone. This is great. I wonder if most of my comments make as little sense as this one did. Took credit to save up money so that in case of emergency one is not forced to use credit… Good one Stan.

If you’re the type of person who has been saying for 10 years, “ya I’ll start saving next year” then you probably never will. If that’s you, start saving now, no matter what…even if you have credit card debt. Put money into a 401k or an IRA so you’re forced to leave it alone.

This is Amazing way of Return on your investment. But how about the people who are in Higher Tax bracket. Credit card purchase is a kind of temptation when one is doing shopping. I always make sure that i pay Credit card bills on time in order to get buried under Debts ..lol

Doh, so obvious, still some people don’t get it. Take my aunt for example. She has like 30k debt, still she keeps a 10k investment which offers her like 3%. Countless times I told her the maths of this and she keeps denying it and instead keeps paying interest for her loans. I’m at a loss.

You shouldn’t have credit card debt. That is the first thing you should try to clear. There are too many people with credit card debt in this country and it is sad. They are living to pay off their debt instead of just living. Greg Ellison

ah… but what about the low interest cards? The ones that give you 0% for a year? How about the concept of just running up the bill, paying the minimums, and keeping the money you would have spent in the bank? This way, you get a free loan from the credit card companies, and you can make some interest from a bank like ING direct or something. THey may only pay 3%, but you can turn a profit on a free loan.

defaults on loans will make you suffer too if you are the next person in line to ask for a loan for a house or car…higher incident of risk in the general population would mean tighter lending rules and higher interest rates so banks are better able to protect their arse.

Spot on John. But the only place you were wrong was in the assumption people will do things based on “common sense”. I am guilty as well often times but human nature is very powerful and often trumps common sense.

Technically, paying off your credit card isn’t risk-free because it reduces your liquidity. Yeah, you have no more debt, but you also have no cash, which is a risk in and of itself. So we’ll call it “nearly risk-free.”

I am going to say right now, math is not my strong suit. I read what you are saying, and you are probably right but I can’t figure out the who’s and how’s of it all. But right now we have one small credit card balance (less than $500) and other than that we are strictly cash and carry. We have the CC for incidentals, emergency, and such.
It is great advice though to get out from under the credit card, thanks John.

True, credit card debit at 18% is BAD debt. But not debt is bad. An example of Good debt are the 4.25% mortgages being written today. I would make minimum payments on a 4.25% mortgage. Whatever extra cash would have been going to extra payments could be invested in assets paying a higher return (like SPDR ETF should do over the next 2 years).

The real trick to getting rich is borrowing money at a lower rate than you can get putting it to work. Once you find that, just keep repeating it.

That’s what I’m saying man! I tell my brother this but he’s stubborn! I have only a 12k limit and I have no balance! I pay it off as soon as I get home and transfer my funds over! Yeah…only 12K limit…but hey…it’s pretty good for a college student man!

"How I Went From Zero to Over $100,000 a Month"

The Original Dot Com Mogul

John Chow, a damn fine person, friend of the community, Ultimate Fighting Championship contestant, member of the Save the Whales Foundation, the man who controls the black market on baby seal pelts and member of the probably yo’ daddy foundation...

John Chow rocketed onto the blogging scene when he showed the income power of blogging by taking his blog from making zero to over $40,000 per month in just two years.